NY, NH & HR CO., BONDHOLDERS'COMMITTEE v. United States

Decision Date10 July 1968
Docket Number306,No. 68 Civ. 296,308,344,345.,68 Civ. 296
Citation289 F. Supp. 418
PartiesThe NEW YORK, NEW HAVEN AND HARTFORD RAILROAD COMPANY, FIRST MORTGAGE 4% BONDHOLDERS' COMMITTEE, the Chase Manhattan Bank, N. A., as Trustee Under the General Income Mortgage of the New York, New Haven and Hartford Railroad Company, Manufacturers Hanover Trust Company, as Trustee of the First and Refunding Mortgage of the New York, New Haven and Hartford Railroad Company, United States Trust Company of New York, as Trustee Under the Harlem River Division Indenture of First Mortgage made by the New York, New Haven and Hartford Railroad Company, and Oscar Gruss & Son, Plaintiffs, Erie Lackawanna Railroad Company, Intervening Plaintiff, v. UNITED STATES of America and Interstate Commerce Commission, Defendants, Pennsylvania New York Central Transportation Company, Richard Joyce Smith and William J. Kirk, Trustees of the Property of the New York, New Haven and Hartford Railroad Company, Debtor, State of New York, State of Connecticut, Commonwealth of Massachusetts, and State of Rhode Island, Intervening Defendants.
CourtU.S. District Court — Southern District of New York

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Migdal, Low, Tenney & Glass, by Lester C. Migdal and Lawrence W. Pollack, New York City, for Bondholders' Committee.

Dewey, Ballantine, Bushby, Palmer & Wood, by Wilkie Bushby and Joseph Schreiber, New York City, for Chase Manhattan Bank.

Simpson, Thacher, & Bartlett, by Albert X. Bader, Jr., Horace J. McAfee, and John J. McGraw, New York City, for Manufacturers Hanover Trust Co.

Carter, Ledyard & Milburn, by Walter A. Kernan and Richard McLaren, New York City, for United States Trust Co. of New York.

Myron S. Isaacs, New York City, and Homer Kripke, Jersey City, N. J., for Oscar Gruss & Son.

Alexander & Green, by J. Kenneth Campbell, New York City, for Erie-Lackawanna Railroad Co.

Robert W. Ginnane, Gen. Counsel and Leonard S. Goodman, Asst. Gen. Counsel, for Interstate Commerce Commission.

Debevoise, Plimpton, Lyons & Gates, by Roswell B. Perkins, Francis T. Plimpton, Robert L. King, Harvey J. Goldschmid, William G. Bardel; and Gerald E. Dwyer, Ulrich Schweitzer, New York City, and Windsor F. Cousins, Philadelphia Pa., for Pennsylvania New York Central Transportation Co.

Sullivan & Worcester, by Joseph Auerbach, and Morris Raker; Boston, Mass., and Robert M. Peet, New York City, James W. Moore, and Robert W. Blanchette, New Haven, Conn., for Richard Joyce Smith and William J. Kirk, Trustees of New York, New Haven & Hartford Railroad Co.

Louis J. Lefkowitz, Atty. Gen., and Walter J. Myskowski, Washington, D. C., for the State of New York.

Robert K. Killian, Atty. Gen., and Samuel Kanell, Hartford, Conn., for the State of Connecticut.

Elliot L. Richardson, Atty. Gen., and Christopher Armstrong, South Byfield, Mass., for the Commonwealth of Massachusetts.

Herbert F. De Simone, Atty. Gen., and Robert M. Schacht, Providence, R. I., for the State of Rhode Island.

Armistead B. Rood, Providence, R. I., for Boston & Providence RR Stockholders Development Group.

Before FRIENDLY, Circuit Judge, and WEINFELD and LEVET, District Judges.

FRIENDLY, Circuit Judge:

For the fourth time this Court has before it an order of the Interstate Commerce Commission in the Penn-Central merger—this one relating to the terms for the inclusion of The New York, New Haven and Hartford Railroad Company (NH).1 The principal decision under review is a Second Supplemental Report on Further Hearing, hereafter "the Report," 331 I.C.C. 643 (1967);2 there is also a Third Supplemental Report on Reconsideration, I.C.C. (1968). In five consolidated actions holders of various NH bonds and trustees under NH bond indentures (all collectively referred to hereafter as "the bondholders") challenge the Commission's conclusion that a Purchase Agreement between the Pennsylvania and the Central on the one hand and the Trustees of NH on the other dated April 21, 1966, and an interim loan arrangement set out in the Report constitute "just and reasonable" and "equitable" terms within §§ 5(2) (b) and (2) (d) of the Interstate Commerce Act. Erie Lackawanna R. R. has intervened, under the broad provisions of 28 U.S.C. § 2323, to assert an unrelated claim—that the Commission erred in failing to set conditions to protect its interchange with NH at Maybrook, N. Y., similar to those prescribed for the benefit of the Central Railroad of New Jersey, the Reading and the Western Maryland. With some regret in view of the public urgency of effecting inclusion of NH in Penn-Central, we are constrained to vacate the order and remand for expeditious proceedings and further report by the Commission.

We begin by noting the somewhat curious posture in which, so far as concerns the bondholders' actions, the case comes to us. Since 1961 NH has been in reorganization under § 77 of the Bankruptcy Act in the District of Connecticut under the supervision of Judge Anderson. The Commission's report approved the sale of NH to Penn-Central not only under § 5 of the Interstate Commerce Act but as a means for the execution of a plan of reorganization of NH under §§ 77(b) (5) and (d). The latter determination must be certified to the District Court for Connecticut, which may approve it only if that court finds the plan "fair and equitable," § 77(e), with review of its decision lying in the Court of Appeals. When the bondholders' actions were filed, the United States moved for dismissal on the ground that the reorganization court had exclusive jurisdiction. We denied the motion in a memorandum, the salient portions of which are reproduced in the margin.3 We adhere to the view there expressed; unfortunate as the duplicitous system of review may be, we see no basis on which we can properly decline to exercise the jurisdiction conferred upon us by 28 U.S.C. §§ 1336(a) and 2321-25. Compare General Protective Committee for Holders of Option Warrants of United Corp. v. SEC, 346 U.S. 521, 74 S.Ct. 261, 98 L.Ed. 339 (1954); Phillips v. SEC, 388 F.2d 964, 969 (2 Cir. 1968).

I. The Commission's Approach to the Valuation of NH.

In determining fair and equitable terms for the sale of NH, the Commission was faced with a task far more difficult than the one it had just performed in setting terms for the acquisition of Erie-Lackawanna, D & H and B & M by the Norfolk & Western, see Erie-Lackawanna R. R. v. United States, supra, 279 F. Supp. at 337-340, 342-345; 389 U.S. at 523-526, 88 S.Ct. 602. Those three roads had, or were claimed to have, earning power. Here, because of the large and increasing losses of NH, the Commission properly found, 658, that "Past experience * * * furnishes no basis for valuing NH from an earnings standpoint except to emphasize the chronic deficit character of the operation which is likely to persist and render the operation a burden rather than an income producer."4 A fair price for NH on the usual basis of capitalization of earnings would thus be negative or, at best, zero; on the other hand NH is conceded to have a very substantial liquidation value.

The Commission discussed the valuation problem at several places. It began by noting, 656-58, that in the negotiations leading to the agreement between the acquiring railroads and the NH trustees "asset value was the primary determinant rather than earning power," and that the evidence before it "was directed largely toward showing asset values upon an assumed liquidation." After saying that "This approach had the appearance of satisfying" the provision in § 77(b) (5) that the means for execution of a plan or reorganization might include "the sale of all or any part of the property of the debtor either subject to or free from lien at not less than a fair upset price," it continued that "We do not look upon liquidation value as necessarily being the equivalent of `a fair upset price'" since "liquidation contemplates a dismantling of the railroad and, therefore, an abandonment of the railroad's operations—eventualities hardly likely, in view of our findings in the prior reports herein that the services of NH are essential." It thought that "a fair upset price should be geared to the requirement that very large segments of the railroad, though probably not all, would have to be maintained in operation" through purchase by public agencies. The Report states that in such event "the pricing would be lower than a complete liquidation could produce"— without, however, elucidating on what basis NH could be required to sell property to public authorities for less than liquidation value. The Commission concluded this portion of the discussion by saying that "if the consideration to be paid is the equivalent of the liquidation value, it will exceed the fair upset price contemplated by section 77(b) (5)."

After extensive discussion and findings as to the liquidation value of NH, the value to NH of the consideration under the Purchase Agreement, and the cost of the acquisition to Penn-Central, the Commission stated its summary and conclusions as follows, 697-98:

As detailed earlier, we have found the liquidation value of NH to be $125 million. We have also found that the value to NH of the consideration to be received is $125 million. It is evident, therefore, that the consideration is at least equivalent to the liquidation value and it will, therefore, be equitable to all parties having an interest in the NH estate to approve the transaction.
From the point of view of Penn-Central, we have found that the total cost to them of acquiring the assets is $159 million. In these circumstances, it would be unfair to Penn-Central to require them to pay a price greater than that agreed upon in the purchase agreement.
Penn-Central must assume a loss-operation which not merely lacks promise of foreseeable recovery, but in fact is plagued by an unrelenting erosion. Thus, they are faced with constantly
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